Azerbaijani economy ready for crisis challenges in eurozone

Business Materials 15 January 2012 15:44 (UTC +04:00)

Azerbaijan, Baku, Jan.15 / Trend /

Trend Deputy Editor-in-Chief for Economic Affairs Ilaha Mammadli

International rating agencies began to decrease sovereign ratings of the EU countries in terms of debt crisis in the eurozone, to what the entire market unequivocally negatively react. On the night of Jan.14, international rating agency Standard & Poor's downgraded the ratings of just nine eurozone countries. At the same time, France and Austria lost their highest ratings.

In particular, long-term sovereign credit ratings of Italy, Spain, Cyprus and Portugal were downgraded by two grades. Along with France and Austria, ratings of Malta, Slovakia and Slovenia were downgraded by a grade.
The crisis in the eurozone may have more negative effects than the 2008 global financial crisis. Based on reports of impending downgrading of the European countries' ratings Eurocurrency rate fell to an annual minimum - 1.2687 dollars to euro. Trading on the U.S. stock areas were closed on Jan.13 with lowering of the highest indexes. Amid rumors of downgrading ratings of the EU countries in "red" zone European stock areas also completed trading on Friday.

Since early 2012, Italian Prime Minister Mario Monti, French President Nicolas Sarkozy and German Chancellor Angela Merkel began conducting shuttle diplomacy to overcome the European debt crisis as soon as possible. 2012 is crucial for the eurozone. The results of the confrontation between the eurozone countries' governments and markets will have an impact not only on the euro future, but also on the European integration process.

Today, Azerbaijani economy is sufficiently integrated into the world economy. At the same time, trade operations with these nine eurozone countries, which amounted to $12.865 billion over 10 months of 2011, accounted for 43 percent of Azerbaijan's total trade turnover. Italy and France ranks first and second respectively among top ten countries, where Azerbaijan exports its products. There are four EU countries - Germany, France, UK and Italy - among Azerbaijan's ten main foreign trade partners, from which the country imports goods.

Seven European countries [including France and Italy] are among the first 12 countries in terms of investments in Azerbaijan, which accounts for about 56 percent of all foreign investments in the country.

Geography of placement of the State Oil Fund's assets are as follows: 64.81 percent - in European countries, 12.03 percent - in North America, 11.17 percent - in developing countries, 5.78 percent - in Asia, 0.69 percent - in the Middle East, 5.52 per cent - in the international financial institutions.

The Azerbaijani government does not see any serious macroeconomic risks for the country's economy in the medium term, explaining it with the fact that the Azerbaijani economy is ready for global and local shocks.
Azerbaijan's economy has increased by three times for the last eight years. There is no similar situation in the history of the world economy. Azerbaijan's budget for 2012 was also formed amid very complex global processes, which covered all the world's leading economic power centers.

The processes of restoring the U.S. economy, connected with the European economy, also very slow. The problems in the U.S. and Europe can also lead to a recession of the Asian countries' economy, since they are mostly export-oriented. According to the IMF forecasts, the potential of the recession in the world today is very significant. Taking this into account, the International Monetary Fund reduced its forecast for economic growth for last and this years.
Global Economic Outlook published by Goldman Sachs bank envisages that GDP of the eurozone in 2012 will drop by 0.8 percent, while the consensus forecast (summary data from other forecasts) promises the 0.1 percent recession for the biggest euro zone. The 0.7 percent-increase is expected in Great Britain. This corresponds to the consensus forecast.

Goldman thinks that U.S GDP will increase by 1.7 of the process, although the consensus gives 2.1 percent growth. Japan's GDP will increase by two percent. This corresponds to a consensus. Goldman Sachs is more optimistic regarding BRICS, expecting 7.1 percent growth with a consensus by seven percent.
Recession, the decline in global demand may lead to the reduction in oil prices on world markets. This is the most important issue for Azerbaijan.

The price onf Azerbaijani crude oil on the CIF basis (port of destination) in the Italian port of Augusta on January 13 declined by $2.98 per barrel - up to $112.32 compared to Thursday. The price on Azerbaijani crude oil on the FOB basis (port of the sender) in the Turkish port of Ceyhan was $111.24 per barrel, or $2.97 per barrel less than the previous price.

The price on URALS from the Russian Black Sea port of Novorossiysk hit $107.27 per barrel, or $3.03 per barrel less than the previous price. The price per barrel of Brent Dated, produced from the North Sea, hit $109.89 per barrel, or $3.05 per barrel less than the previous price.

Taking into account that $80 per barrel was taken as the base price while forecasting the budget figures, the Azerbaijani budget still has profit with this oil price.
On the other hand, the situation in international financial markets, the volatility, the situation with the rates, the problem of borrowing can be viewed as risks to the Azerbaijani economy as the country has significant foreign exchange reserves worth over $42 billion, which are placed and managed in these markets.

The low level of interest rates leads to a decrease in revenues obtained by managing these reserves. All of this causes some concern in Azerbaijani financial bodies.
The Azerbaijani government's actions to restrain the process of delivering Eurobonds to the market were timely. Otherwise, the country would face with a problem like Georgia. The crisis in the euro-zone has cheapened the cost of the Georgian Eurobonds, because the investors are cautious. The investors' caution for the long-term period is justified, as the problems may arise in the Georgian economy in the case of the collapse of the euro-zone.

The recession, the decrease in neighboring countries' economies may also lead to a reduction in the amount of money transfers. Azerbaijan receives money transfers from other countries. Although their amount is not so great, they are important for certain layers of the population, especially for the regions. This is a major risk for Azerbaijan.
The head of the Azerbaijani Central Bank said that Azerbaijan's economy is rather stable and convincing globally.

"If we consider the crisis years, the country's economy increased by an average of five percent per year in 2009-2011," Rustamov said. "Taking into account the world processes, it is rather high economic growth. Last year, the growth in non-oil sector reached nine percent. This is a good index. The currency reserves reach $42 billion, surplus of balance of payments for last year is expected to reach $ 14 billion, reaching 67 percent of GDP. Japan's foreign debt amounts to 200 percent, in the U.S - 100 percent, in some European countries - 100 - 150 percent. The figure is eight percent in Azerbaijan. This is a key index of stability in the international context."
This does not mean that we should live in peace and global challenges are not for us, he said.

There are challenges for Azerbaijan. If a country wants to maintain the stability of its economy in the long term period, it must immediately respond to these challenges. Therefore, the Azerbaijani government takes actions.

One of these was the recent decision to include Turkey and Russia in the list of the countries, the assets of which may include the funds of SOFAZ portfolio. The effective management of the country's oil revenues is one of the urgent issues as about 73 percent of Azerbaijan's strategic currency reserves fall to the share of SOFAZ assets.